A machine that is used in an industrial process to make a certain product has an

Question

A machine that is used in an industrial process to make a certain product has an initial cost of $50, 000 and it is expected to have a zero salvage value. The maximum capacity of this machine is 7,000 units per year, and its life is estimated to be 4 years. The unit variable cost (raw material, energy, etc.) is $12.40, the total fixed annual cost of supervision and taxes is $20, 000. The company uses 15% interest compounded annually. If the machine operates at 50 percent maximum capacity: a) Calculate the average unit cost and annual total cost b) Calculate the incremental production cost.

Explanation / Answer

Variable cost $ 60,000 Fixed cost $ 20,000 Total cost $ 80,000 No of units $    3,500 Avg unit cost $          23

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